Former AIG Chairman and CEO Maurice Greenberg. Photo credit: AP Images.

The Federal Reserve Board of New York last week again asked a federal court in Manhattan to dismiss a lawsuit filed by Maurice Greenberg related to how the government provided financial aid to American International Group in 2008.

The suit was filed in November by Starr International, a Switzerland-based firm controlled by Greenberg, former chairman and CEO of AIG.

The suit, filed in the Federal Court for the Southern District, alleges that the federal government “discriminated” against AIG, New York, by taking over the insurer rather than loaning it money when it ran into financial problems in September 2008. Representing the Fed in the suit is John S. Kiernan, a partner at Debevoise & Plimpton, LLP, in New York.

In the New York filing, lawyers for the Fed said one of the reasons the suit should be dismissed is that the actions of the federal government, including those of the Fed Bank of New York, brought the company back from the brink.

“In Sept. 2012, four years will have elapsed since FRBNY took decisive, affirmative, historic actions to rescue AIG from bankruptcy,” the filing stated. “By now, it is clear that the AIG rescue avoided potentially catastrophic consequences to the national and global economies from AIG’s bankruptcy.

“The bankruptcy of AIG would have inflicted substantial hardship on thousands of Americans, including those who, absent a rescue, would have lost their AIG jobs,” the filing adds. “Today, AIG—a storied American icon in the insurance world— remains a going concern.

“For the American taxpayer, all of the FRBNY loans connected to the AIG rescue have been repaid, principal and interest,” the filing continues. “For AIG, all of its advances to Maiden Lane II and Maiden Lane III have been fully repaid, principal and interest.”

A companion suit was filed in the Federal Court of Claims in Washington making the same allegations against the federal government. Also on Monday, a judge in the Federal Court of Claims cleared the Washington case for trial.

However, a Washington lawyer and former top legal aide at a federal regulatory agency who requested anonymity cautioned against reading too much into the Court of Claims decision.

“The court has to accept all allegations as true in this type of proceeding,” the lawyer said.  “It is not ruling on the truth of the allegations, but ruling on whether, if true, the allegations are sufficient to go to court.

“So the court’s decision does not indicate that the judge agrees with the Greenberg argument, only that if true, he presents a case that should go to trial,” the lawyer concluded.

The Fed’s answer in the New York suit goes to the key issue the Washington court said should be determined by further proceedings: that federal officials “coerced” the Fed board into accepting the Fed demand that it turn over 79.9% of its stock in exchange for an initial $85 billion in cash in September 2008.

“Starr’s allegations that the AIG board lacks independent capacity to evaluate a demand fall far short of satisfying the rigorous pleading standard Delaware courts have appropriately imposed before permitting individual shareholders to sue for a company,” Kiernan said in the Fed filing.

“The AIG board’s conduct in response to this motion by itself amply disproves Starr’s unsupportable contention that FRBNY has absolute control over that board,” the Fed answer said.

In its answer to the Fed’s initial brief, the latest Fed filing said Starr and Greenberg had “abandon[ed] its unsustainable claims that FRBNY deprived AIG and Starr of constitutional rights and breached Delaware law fiduciary duties in its September 2008 rescue lending to AIG.”

In the New York case, the Fed brief says that all of Starr’s claims are based on Delaware law.

“If Delaware law does not apply to the challenged actions, the claims should be dismissed as legally unsustainable,” the Fed brief says.

The brief adds that, “Starr concedes that state fiduciary duty law cannot be applied to curtail FRBNY’s exercise of functions prescribed by federal law. Starr tries to escape the consequence of this proposition by contending that FRBNY’s federal function consists only of lending money to individual borrowers and setting interest and collateral requirements.

 As Starr would have it, federal law would displace Delaware law from certain aspects of FRBNY’s rescue of AIG, but not other aspects like ML III and the transactions in AIG equity,” the brief said.

The brief added that the Fed “acted to foster the financial stability of the United States in all of its conduct with respect to the AIG rescue.” And, “In doing so, it was carrying out a quintessential federal function pursuant to an enabling federal statute, Section 13(3) and the Federal Reserve Act’s “incidental powers” provisions.”

The brief added that “These kinds of activities are not subject to Delaware law rules that Starr contends would have required FRBNY to act differently.